Ready to evacuate at any time? Economic weakness and AI trading boom may trigger a correction in U.S. stocks

On Thursday (September 11), the U.S. Dow Jones Industrial Average (DJIA), the S&P 500 (SPX) and the Nasdaq cn.xmfx.meposite Index (COMP) all closed at record highs. As always, such milestone moments will always make more cautious market participants nervous. They are worried: When will we judge that the stock market has reached its peak?

Peter Berezin, chief global strategist at BCA Research, said: "What will trigger the next round of stock market crashes is like asking which snowflakes will cause an avalanche."

In a new research report, Berezin reviewed previous cases of sharp pullbacks in the stock market, pointing out that it is often not a single factor, but a superposition of multiple events, which makes it more difficult to predict when the stock market will start to plummet.

Taking 1987 as an example, before the collapse of "Black Monday", the US trade deficit widened and the dollar depreciated, which triggered concerns about the Federal Reserve's forced rate hikes. At that time, the yield on the 10-year Treasury bond soared to 10% from 7.1% at the beginning of the year; in addition, the U.S. House of Representatives also submitted a bill to limit tax incentives for corporate mergers and acquisitions.

Similarly, the stock market plunge in 1998 was not caused only by the bankruptcy of the hedge fund "LTCM". At that time, the collapse of Asia's largest private investment bank, "Baoqin Investment Holdings Co., Ltd.", was also one of the incentives; the market was also worried that China would be forced to depreciate the RMB, and then Russia defaulted on sovereign debt.

Even the bursting of the Internet bubble in 2000, the reason was oversimplified. BCA data display, it was not just the overly high valuation that caused the bubble to burst - the Federal Reserve restarted interest rate hikes and surged stock supply (the net stock issuance was $9 billion in 1999, while in this quarter alone reached $59 billion in the first quarter of 2000), which both scared investors.

Moreover, the stock market pullback in recent years shows that the market can "ignore" adverse factors for a period of time. In the fall of 2021, the signal that the surge in inflation will lead to a sharp rate hike in the Federal Reserve is very clear, but the S&P 500 index still fell 27% from early 2022 to October of the same year.

However, previous stock market plunges also sent a positive signal: a cn.xmfx.meprehensive bear market usually occurs during economic downturns. "When the economy remains resilient (such as 1987, 1998, 2020 and 2022), the stock market tends to rebound quickly."

Unfortunately, Berezin believes that looking forward to the future, the two major factors supporting the current bull market—economic resilience and the artificial intelligence boom—will weaken.

The deterioration of the labor market shows that the U.S. economy has shown vulnerability. "The unemployment rate seems to be slightly rising, but it is actually covered up by the situation that 'many people give up looking for a job'. If people who are not in the labor market but still want to work' are included in the statistics, the unemployment rate has risen by 0.76 percentage points since January this year."

He added that the real estate market is "becoming increasingly unstable"; outside the United States, economic growth has been relying on demand support from "advanced response to tariffs."

In addition, although artificial intelligence represents a long-term growth trend, it is also insecurity to be immune to cyclical economic downturns. BCA pointed out that cn.xmfx.mepanies such as MetaPlatforms (META) and Alphabet (GOOGL) are highly dependent on advertising business. If consumer spending slows down, advertising revenue will drop sharply.

BCA said: "Past experience shows that investors often feel uneasy when free cash flow begins to decline. This happened in the end of 2021 - at that time, the total free cash flow of "hyper-large-scale technology cn.xmfx.mepanies" such as Amazon (AMZN), Google (Google), Meta, Microsoft (MSFT) and Oracle (ORCL) temporarily declined."

BCA believes that the capital expenditure of these super-large-scale technology cn.xmfx.mepanies will not peak until the second half of 2026, but the stock prices of AI-related cn.xmfx.mepanies, which currently account for one-third of the market value of the S&P 500, "may plummet long before that." By then, as stock market wealth shrinks, consumer spending will further decline.

Berezin concluded: "While it is impossible to know exactly when global stock markets will hit the top, there is enough vulnerability in the market at present, which is enough to show that we shouldWhen 'put your finger near the exit key' (ready to evacuate at any time). ”

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